Odd Lots - The NYC Fiscal Crisis Of The 1970s Has Some Important Lessons For Today

Episode Date: February 26, 2018

In the 1970s, NYC teetered on the verge of bankruptcy. This crisis lead to the dismantling of the city's generous social safety net. On this week's Odd Lots podcast, we speak to Kim Phillips-Fein, historian and author of "Fear City: New York's Fiscal Crisis and the Rise of Austerity Politics." She walks us through what happened then, and what lessons it holds for fiscal politics today.  See omnystudio.com/listener for privacy information.

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And I'm Joe Wisenthal. So, Joe, it is firmly that time of year again. It's the time when we start talking about deficits. Do we have to? No, actually, sorry. This is actually one of my favorite subjects. I love discussions about fiscal policy. I hate the way fiscal policy is typically discussed in the

media in which deficits are always per se bad and attempts to cut the deficit are always considered good and neutral. So I'm actually very excited about anything having to do with deficits, and I'm confident that whatever we're going to talk about, we will frame in a non-cliche manner. Okay, so let me set the scene a little bit. We did just have the U.S. government pass a spending proposal, which is widely expected to boost the deficit by a significant degree. And at the same time, of course, we have deficit and spending hawks who get all worked up about the prospect of America basically spending too much money. And that could be bad over the long term. And in theory, it should force the U.S. government to ratchet down some of its expenditure.

That's how the mainstream theory goes. But as you pointed out repeatedly, that's not necessarily correct. Right. So the mainstream view seems to be, oh, we're spending all this money. What can we take a hatchet to? Whereas I think the more realistic way to think about it is here's this thing on paper that we call a deficit. How can we use this as a pretext to take the acts to government spending we don't like? Ah, okay. So you have said the magic word for this particular episode, which is pretext. Today we're going to talk about an example in U.S. history, which one historian reckons. was really a good instance of a deficit of overspending being used as a pretext to change social policies. So this should be an interesting one. I think this is that kind of conversation that will not make me cringe.

All right. And just before I bring her on. So the example that this particular person uses is New York in the 1970s when it sort of teetered very, very close to the brink of bankruptcy. and she argues that New York actually made a certain number of decisions that ended up having a very, very big impact on where the city went from there. So we're going to bring her on. I can't wait. So without further ado, our guest for this episode is Kim Phillips Fine. She is the author of Fear City, New York's fiscal crisis and the rise of austerity politics. She's also a historian of 20th century

U.S. politics and a professor at NYU. So Kim, thanks so much for coming on. Thanks for having me. So before we begin, I wonder if you could sort of set the stage for us about what New York was like before this budget crisis hit, because a lot of people don't remember now, you know, three or four decades later, that at one point, New York was this almost, I guess, social democratic utopia or maybe that's pressing it a little bit, but it was close to it. Yes. Well, I think one of the things that I talk about in Fear City and which I think many people have been interested in is New York in the post-World War II period was a city that built on but also departed from much of what was dominant in terms of New Deal liberalism in the country as a whole. New

liberalism kind of as it played out across the United States had a strongly suburban quality to it. There were the federal housing administration, subsidies and loans for mortgages. And there was a way in which on a national stage, in some ways, was tilted towards the suburbs. New York, however, was always very different than this, obviously. And the city had one of the strongest social safety nets that we see in the United States in the post-war years. The local government in some ways kind of takes elements that are present in the national scene and pushes them further. There are more than 20 at the peak, public hospitals, a network of public health clinics that run through the whole city. Public housing is very powerful in New York,

especially kind of federal public housing. The public transit system, of course, is unparalleled in the country and also has very low fares throughout this period. The school system was, you know, in contrast to the New York City public schools today, which are very heavily reliant on a lot of private fundraising for many of the perks like art and music, even reading enrichment in some places. Those things were really all paid for via the Board of Education. The city's labor unions were quite strong. This is the point in time when the public sector is unionized for the first time. So in all of these different ways, the city's public kind of has a ambitiousness in terms of its public spending and the kinds of services that city residents come to expect simply by

into being New Yorkers. There also, of course, a higher education expands considerably in the city over this point, and CUNY is free. It's a tuition-free university. So who were the biggest opponents of this? I'm sure even during the heyday, there are always going to be people who think a city should be run differently. Is it people upon whom the tax burden falls to fund this, or is it more of an ideological nature of people who think taxes aside, this is not what the government should be doing. Well, it's a combination. And I think that the, so just one more word about kind of where this comes from.

The New York City is kind of drawing on a long tradition, really going back to the 19th and early 20th century, probably of a kind of liberal to left politics. You know, they find triangle shirtways fire disaster, the workplace safety and fire codes that follow it. Many of the public hospitals predate the New Deal. but this public spending in the city really grows in and after the New Deal. And it does so at a time when the city is getting large transfers from the federal government. So the city had been property taxes are always the major, the largest revenue source.

But during and after the New Deal, these are supplemented by transfers from the federal and to a lesser extent, the state government. So this expansion generates a lot of support in the city overall. However, there are people in the city who are always highly concerned about it, especially among, and this concern grows in the late 50s and early 1960s. And it comes, I think, initially it's less actually really an ideological thing purely, although it's hard to prize apart. But the first kind of sense of alarm comes from people in the business community who are concerned about having to bear a higher proportion of this tax burden going forward. And they become especially anxious about this in the early 1960s when the city first is first starting to experience some of the problems that will manifest more dramatically about 10 years later. And the new mayor, John Lindsay, pushes for a stock transfer tax or a small tax every time a stock changes hands, as well as a personal income tax and a small commuter tax. These taxes set off a wave of alarm in the business community.

the New York Stock Exchange briefly threatens to move up to Stanford or maybe to California. So there's a kind of a deep sense of alarm. It's both coming from a kind of real economic concerns about being asked to bear the burden for these services, but also kind of more deeply maybe a sense of who is the city government responding to whose voices seem to matter the most, who counts for the city government. And I think that's part of what the city's economic elites become concerned. about in the early 1960s. So on that note, before the 1960s, we have New York kind of ticking along. It's providing all these public services. It's borrowing from the market in order to fund those.

It's also getting some income from the federal government. And then eventually by the 1970s, it stumbled into a full-blown fiscal crisis. Walk us through what the tipping point was for that, because I'm always curious when it comes to debt crises, you know, rarely does a budget kind of explode from nothing to billions or trillions of dollars overnight. It's sort of a long process, but then inevitably something kind of tips it over the edge. So what was it for New York? Well, for New York, what happened, and this I think also goes back to the discussion of the pretext at the beginning. I mean, New York in the late 1960s and early 1970s was experiencing a genuine revenue crunch. And what happens, there are several different factors that kind of come together for the city.

The first is the national recession that begins in the late 1960s, but which is much deeper in New York, partly because all throughout the 1950s, I mean, through the early 1960s, it's easy to forget this today, but manufacturing was the most important part of the city's economy in the 1940s and early 1950s. Those companies are leaving the city and going both. the surrounding suburbs and also to the south and in the case of the garment industry overseas. And these jobs, which had really been the motor of the city, are no longer exist. The service sector jobs don't pay as much and don't generate as much revenue for the city. And that is sort of the first downturn of the late 60s, which kind of takes, there's a stock market

decline and Wall Street is in trouble as well. This kind of deepens the revenue problems of the city. So first of all, there is actually a real revenue issue that the city is facing. The second important issue is the end of the war on poverty. Or like during the mid-1960s, the city's spending had expanded still further, funding daycares, drug treatment clinics, different kinds of welfare programs. Medicaid and aid for families with dependent children are both structured in such a way that the city has to bear 25% of the cost of those programs, which is much, much higher than really anywhere.

else in the country, the way New York State splits that up. So the city actually has these new costs that are associated with the war on poverty. After Nixon's election, although you don't start to see the really sharp declines in spending, it stopped growing as it had been earlier. And any expectations that there would be a kind of continued expanding commitment from the federal government to address issues of poverty and racial inequality, that expectation is gone. So I think that's the second issue is that previously there might have been some sense in the city, you can expand spending. And we're at a moment where the federal government is actually assuming more of the cost of these things that might continue in the future. That goes away.

And the city turns to a kind of extent, every year in the late 60s and early 70s is a kind of dramatic budget battle with Mayor Lindsay going up to Albany. New York is always dependent on Albany's permission to pass new taxes. They're asking for new sales taxes. They're asking for different income taxes. It is obviously. that the problem is developing. Albany is itself becoming increasingly anxious about New York state's competitiveness as deindustrialization progresses. They don't want to extend the same, give New York as much taxing power as it asks for. As a result, all in all, the city starts to turn to short-term debt in a kind of really dramatic way in the early 1970s. And that is really

what opens up the possibility of a true fiscal crisis. So I think there's two things together. One is the underlying problems the city was having generating enough revenue, but that winds up turning into a debt crisis because the city never really addresses the underlying factors leading to the crisis. Instead, the mayor decides to borrow and to borrow this short-term debt that's due very quickly, generating high interest rates and is kind of a constant problem. pressure to pay it back. They're borrowing against the kind of rerouting funds from the capital

budget to use for annual operating expenses. And this is really, I think, you know, that's that's what sets up the possibility of a true crisis, is that they are becoming more and more dependent on the banks. At the very moment when it should be noted, the banks are becoming less reliant on municipal bond advantages. This is at the moment of kind of the relaxation of a lot of the regulations for the financial industry, banks like First National City Bank. Now Citibank are expanding their international portfolios. Previously, municipal bonds, they have a strong tax advantage, but that is becoming less important as more income is generated overseas. And maybe ideologically, too, the idea of being committed to a certain city, a certain place, it holds less cachet. I mean, I think earlier in

the post-war period, a lot of these bankers, you know, it felt good to finance a city like New York. There was a kind of prestige to it, a sense that you were involved in helping support a major metropolis. And that, too, I think, starts to lessen, that sense of commitment. So before we get to how this episode was used to really overhaul the city's provisions, how did they solve the crisis? How did they solve the crisis? Well, I mean, what happened, so just to give a little bit of a sense of how things played out, in the spring of 1975, I mean, all over. late 1974, early 1975, things became increasingly tense with the banks. The bankers ask the city to give evidence about taxes that it just can't provide. And eventually, the banks refuse to

underwrite the city's bond offerings any longer. And this is what kind of provokes the crisis. And for the rest of 1975, New York is teetering on the edge of bankruptcy. And many people believe the city is most likely to simply default at some point over the year. The crisis is solved. There are a couple of things that happen. The first is that state agencies that are staffed mostly by people picked by the governor, including a healthy representative of private executives, are created to oversee the city's budget and both to refinance its debt and then to give, you know, to kind of give money to the city so that in an attempt to restrain its spending. So that happens. And then all Ultimately, although President Ford is known for saying, you know, the famous daily news headline, drop dead, which is what most people know about the fiscal crisis, he actually, after saying he was never going to permit any bailout for the city of New York, and he was going to veto any proposal to provide federal aid.

There is a program of short-term federal aid for the city, which is very important in terms of getting it out of the fiscal crisis. And finally, the city's labor unions actually ultimately purchase large quantities of its debt, which also helps it kind of ride out the crisis. But it takes a while before even it's clear the city isn't going to actually go bankrupt. Okay. So what are the tough political decisions that go into this solution? Because I think it's fairly clear at this point that, for instance, New York doesn't have as many public health care clinics or free universities. So presumably something happened there. Right. the federal government kind of insists upon a set of cuts that the city has to make in order to get any aid.

And the federal government never actually mandates any particular cuts. It is always in terms of moving towards a balanced budget. But the city winds up closing hospitals, closing clinics, defunding daycares, closing drug treatment programs, tuition at the city university, raising the transit fair, beginning the long series of transit fair hikes that we still see. today. So, and these are some of the things, I mean, you know, it winds up changing the social contract in the city to significantly contract many of the services that had been present earlier. You know, I think that's what it, it's solution to the crisis is in a way. You can get the news whenever you want it with Bloomberg News Now. I'm Amy Morris. And I'm Karen Moscow here to tell you about our new on-demand news report delivered right to

your podcast feed. Bloomberg News Now, is a short five-minute audio report on the day's top stories. Episodes are published throughout the day with the latest information and data to keep you informed. Yes, there are other products like this from a variety of news organizations, but they usually rerun their radio newscasts throughout the day. That's not what we do.

We create customized episodes that can only be heard on Bloomberg News Now. And we don't wait an hour to publish breaking news. When news breaks, we'll have an episode up in your podcast feed within minutes. So you're always getting the latest stories and developments. Get the reporting and the context from Bloomberg's 3,000 journalists and analysts we're all over the world. Listen to the latest from Bloomberg News Now on Apple, Spotify, or anywhere you listen. So here's my question. What would that social contract have looked like if New York had just declared bankruptcy and sort of gone its own way? Well, it's impossible though what would have happened if the city had

into bankruptcy court. I'm not sure that it would have been any better for the city necessarily to go into bankruptcy court. There was a lot of anxiety, deep anxiety about what bankruptcy would mean for New York and turning the city's affairs over to a bankruptcy judge. It's quite unclear what that would have meant or would that actually have saved the services? I don't think so. I mean, I think that the alternative for the city, if there was an alternative for the city, it would have been a political one or finding some different way to fund this. I mean, if there was any way to maintain the services, you would have to do it through politics or finding some way to fund them that was more stable and, you know, had the potential to actually

survive. And that, you know, for example, changing the Medicare funding formula would have really changed the city's balance sheet. You know, the federal opposition and hostility to New York was very great. Ford at that point is surrounded by people like Donald Rumson. who was his chief of staff through this period. Alan Greenspan, who was the chair of the Council Economic Advisors, and William Simon, his Treasury Secretary, who actually came out of the world of municipal bond trading but was fiercely

hostile to New York and had no interest in extending the city any aid. They really believe that New York could go bankrupt and it really wouldn't have much effect on the national bond market, which seems crazy to me or the national economy. In some ways, I mean, these was like a, there were other people in the 40s. administration who had a more tempered approach or who were concerned about what it would mean for the national economy, for the perception of the United States during the Cold War, for other cities and states need to borrow, that all of these would be negatively affected if New York went bankrupt, let alone New Yorkers themselves. The people clustered around Ford, however,

the conservative faction in the Ford administration did not have these concerns. They had a kind of sense of rinksmanship or wanting to push things as far as they could and to force the city to kind of make a set of, to really dramatically repudiate its earlier politics. And if it didn't, if it wasn't willing to do so, they were willing to let it go broke. In your view, has the position of New York City within national politics changed much or is it similar? I feel like there's always this sort of hostility towards New York. If it's still, maybe dislike of Wall Street elite bankers, the perceived leftward tilt of the city, you don't get the impression that people outside of New York really like New York that much. And I'm curious if in your view it's really even that

different today. That's an interesting question. I know, I have to say, I think it probably is actually somewhat different today that I think that New York has kind of post 9-11, even the kind of media images of New York today, Seinfeld, friends. I just, I think there's a way in which New York, for better or worse, the rough edges are off of it in the national. consciousness. And I think at this point, you know, New York is the, during the 1970s, it's right after the height of the movement against the war in Vietnam. It is a time of profound cultural conflict in the country. New York is seen as a center of black radicalism, of Puerto Rican radicalism with the Black Panthers and the Young Lords, respectively. It is seen as

kind of the epicenter of the gay rights movement. It is seen as a kind of hotbed of feminism. In all these different ways, I think New York is seen as a kind of, I don't know, a center of licentiousness and of permissiveness. And in some ways, the fiscal crisis is just like another manifestation of this. It's like a lack of restraint in city government as well. There was a lot of constituent mail. A lot of people wrote letters to their congresspeople about New York. And although a lot of, I'm not sure that there was a national sense that New York, you know, deserved its problems. And I'm not sure that there was actually that much hostility among kind of the grassroots constituents on the national level, around the country, of people who really wanted to see New York suffer or something.

But I think there was enough of it that politicians could play on it, harp on it. Yeah, and I hold New York up in this way. So aside from these sort of cultural differences, there's a big difference. between New York and the U.S. as a whole. And we kind of touched upon it in the intro, which is that New York ultimately has to come up with its own budget. And the U.S., the federal government also has to come up with its budget, but it has the ability to issue sovereign debt

and to essentially print its own money, which gives it some leeway when it comes to spending. So I guess my question is, you know, We've talked about New York. Clearly, some tough choices were made when it comes to that particular deficit. But when we see the federal deficit begin to go up, do we need to worry that we have to start making tough choices yet again? I guess I think that the question, both in New York in the 70s and also nationally today, really is the kind of society that we want to have. have and what the resources are to create that. But I think the expansion of the deficit should not

lead to a call to cut social services. There is plenty of money in this country to fund those social services. And the question is how and where and whether people want to have them. Do we want? And in some ways, I think the same was true in New York in the 70s, although for cities it is different, not just in terms of being able to print money, but the taxing power of a city, its ability to tax incomes in particular, is just much less than that of a state or a federal government. And I think one of the underlying questions that the fiscal crisis raised is, should you fund these kinds of redistributed social services at the local level? Is that always going to be kind of an unstable basis for them because of the possibility of capital

flight in one way or another? Should such programs really, the bulk of the bulk of the the fiscal burden fall at kind of levels of government where people have less ability to exit. So I think that's part of the question that is raised. But more generally, I think it's, you know, the issue is really what type of society do we want to live in? What kind of inequalities do we want to tolerate? What are we willing to do about them? And how can we find and then, you know, and then the question how to pay for them out of that. I love that angle of the degree. degree to which cities actually have strong taxing power. I think you mentioned earlier the threat even seems kind of hard to believe that the NYC was going to move to California at one point.

In the current era, we just think of this incredible rise of cities. It's one of the most dominant forces in the economy. These megacities that just attract more and more and more attention and activity away from the countryside, these huge clusters of activity. Do you think that force is stronger today than it was, say, in the 70s where perhaps back then companies and rich individuals could more credibly threaten to leave the city, whereas today they could say it, but it might be so much harder. That's a really interesting question, actually. And I think that threat was a credible threat in the 70s. I mean, many companies were leaving the city and New York loses 10% of its population over the 1970s. So people actually are moving out of New York, and the same is true for many different urban

centers in the Northeast and Midwest in particular. The Rust Belt cities are all lose population, lose investments over this period. So, you know, the New York Stock Exchange is an interesting example. It does seem totally absurd. How could they go to Connecticut? The New York Stock Exchange. The internal memos and discussions of it suggests that it was actually a somewhat serious, topic of conversation within the stock exchange. Obviously, that didn't happen. But I do think it was

a credible threat then. Is it a credible threat now? Well, it's interesting. I think it, although, yeah, maybe not quite as much in the same way. But it also, I'm thinking of the different cities kind of vying for Amazon's headquarters. And I think that we, even as cities, have grown stronger and have proved to be this kind of magnet for people and money. It's also a moment when businesses have become perhaps more powerful and people perceive them. They're not tied to a single place. They're capable of looking around shopping for what locale can give them the best deal on any one of a number of fronts. So it may be a double movement. So on the topic of businesses becoming more powerful. I just wonder, when it comes to Donald Trump's recent tax reform and his budget,

we have seen some people describe that as obviously business friendly, but also sort of anti-urban in that it seems to take direct aim at a lot of big cities and metropolitan areas in the U.S. Does that mean that the tide is turning against some of these big cities? Well, I wouldn't overstate the friendliness of the federal tax code to cities previously. I mean, things like the mortgage interest deduction has never been very good for cities, really. I think Trump himself, despite his background in New York, has always had a certain kind of hostility to aspects of cities. So I guess there are aspects of the tax bill that will be bad for cities, but I don't know if it would, I'm not sure it's as dramatic a kind of. pendulum swinging away.

Local politicians have warned quite a bit about the ramifications of, most notably, the elimination of the state and local tax deduction. Would you say we're still pretty far away from anything like what we saw in the 70s? Yes, we are definitely far away from anything like what we saw in the 70s. At least in New York, we are. And again, I think in New York, there are a number of the disarray in the budget office leading up to the 1975 fiscal crisis was quite profound. the city didn't have systematic bookkeeping.

It had kind of abandoned a certain systematic bookkeeping at all. That is just not the case today. And also the underlying strength of the city today is much greater than it was then. So I think we're quite far from an actual fiscal crisis, similar to that in the 1970s, at least in New York. Now, I think other states and cities around the country are in much more difficult situations. Many state governments are in pretty bad. fiscal shape, really, and I think will be hurt pretty profoundly by these tax changes. All right, that was Kim Phillips Fine, the author of Peer City, New York's fiscal crisis, and the rise of

austerity politics. Thanks so much for coming on. Okay, Joe, so I thought that was a fascinating conversation, and it's really important to have it as we hear lots of talk about the deficit flying around. It's important to remember that ultimately we're talking about political choices when it comes to how we spend our money. Absolutely. I mean, obviously there's a difference between the federal government and the city government and the strict monetary restraints. But this idea that budgets are a reflection of our priorities and that math is not the only factor and that we still have to make decisions about what level of inequality or other injustice we want to accept can't be just completely separated from the sort of revenues and outlays. Yeah, I will make an

unpopular finance confession, though, part of me feels a little bit uncomfortable whenever we say that deficits don't matter. Like, clearly, they must matter eventually, right? The government can't print money forever to finance ballooning spending. No, I think actually it's very popular. I don't necessarily disagree. Let's have a whole episode on this specific aspect of the question. Let's do that soon. Oh, God. Okay. Let's do that. One other point, just this idea of cities, and I love that perspective about the perception of New York in the 1970s. And because I do sort of think that especially post-financial crisis, New York isn't that popular of a place on the sort of national political landscape. I guess there's some debate.

But the way our guests described it in the 70s is sort of this center for radicalism on all these different fronts. And then the way that they interplayed with all these are fiscal and economic questions I found to be really fascinating. Yeah, and people don't necessarily always connect the two, do they? No, but they should. All right, this has been another edition of Odd Lots. I'm Tracy Allaway. You can follow me on Twitter at Tracy Allaway. And I'm Joe Wisenthal.

You can follow me on Twitter at The Stallword. And you should follow our producer, Tofor Forges, on Twitter at Forrest T, as well as the Bloomberg head of podcast, Francesca Levy, at Francesca today. Thanks for listening. On April 4th, 2023, around 2 in the morning, a man was found stabbed multiple times on a sidewalk in downtown San Francisco. Hey, who did this to you? What happened next turned the story into a political firestorm. Reports have identified the victim as Bob Lee, the founder of Cash App.

From Bloomberg Podcasts, this is Foundering, the Killing of Bob Lee, beginning April 16.